The rise of capitalism lasted for several centuries. Overall progress was discernible until roughly the mid-1970s. However, it was a bumpy ride, with many ups and downs and a large number of casualties. In the very early stages of capitalism, industrialisation was, by and large, embraced by the new working class. For example, women liked working in cotton factories as it gave them paid employment, was easier than toiling in the fields or as servants, and provided opportunities for social interaction. Even children could work, adding to the family income. However, circumstances soon began to change. Further industrialisation led to a decreased demand for labour and consequently reduced wages and degraded working conditions. In contrast, the capitalist class became richer and more powerful. It was increasingly clear that, contrary to the belief of classical economists, leaving the market to its own devices would not spontaneously keep improving everybody’s lives, but only of those at the top. In reaction to this, the first revolutionary and socialist movements, as well as numerous other critics of the system, began appearing around the middle of the 19th century.
Remember the ‘right arm’ of capitalism? Well, socialists tried to exercise the left arm by vilifying competition and glorifying cooperation (this has been often confused with glorifying the state, which was not the case, certainly not for Marx). Their failure to recognise the possible shortcomings of cooperation, as well as the value of competition, greatly hampered their attempts to put their ideas into practice. It took a great neo-classical economist and the father of micro-economics, Alfred Marshall (1842–1924), to highlight the need for that balance, which had a lasting effect on a student of his, John Maynard Keynes, but we are getting ahead of ourselves. Of socialist thinkers, there is no doubt that Karl Marx (1818–1893) was the most influential. He tried to reconcile moral philosophy and science by claiming the inevitability of moral progress. He never explained why we need a revolution if progress is inevitable, but let’s leave this aside[1]. With all his zeal for revolution, Marx too succumbed to the allure of making the study of social issues a respectable scientific discipline and was strongly influenced by one of the classical economists, David Ricardo (1772–1823). A lack of empirical data was compensated for by a near-incomprehensible writing style which probably, somewhat paradoxically, contributed to his popularity. Marks did make some very astute observations, though, that are relevant even today. However, of all his ideas, the ones taken up (mainly after his death) were the need for violent revolution and a usually misinterpreted dictatorship of the proletariat. His work was used as a theoretical basis for the creation of socio-political systems that Marx would not have recognised as having anything to do with his own vision.
This was in Europe, though. Socialist ideas didn’t have such a great impact in the US, the rising star of capitalism. In the second half of the 19th century, the US had just emerged from its civil war (1861–65) and the shameful legacy of slavery. The American Civil War was not, of course, only about slavery, but was also a fight for supremacy between the industrialised (capitalist) north and the rural (‘aristocratic’) south. Notwithstanding all the post-war concessions, the north won convincingly, and the subsequent period was characterised by the emergence of huge monopolies and the subordination of production to the accumulation of profits in the financial system. These monopolies were so powerful that, in effect, they risked bringing competition (a driving force of capitalism) and even possibly the whole burgeoning system to a halt. It was clear that, if left to itself, this still fledgling socio-economic organism could easily get out of control. That period is known as the ‘robber barons’ era. It brought prosperity for some, but also huge instability and inequality, which led to US President at that time, Theodore Roosevelt (1858-1919), taking decisive measures to curb their powers at the start of the 20th century.
Despite the aforementioned crises, living standards of people in the West generally improved from the mid-19th century onwards. This was partly due to increasing awareness of the terrible working and living conditions of the working class, partly due to the fear of socialism and more inclusive voting rights, but mostly out of necessity. If your export market is shrinking, you have to make sure that your internal market grows to compensate. One way to make it work is to keep increasing wages and keep selling your products to those who are producing them (the car manufacturer, Henry Ford, was one of the first industrialists to get this point). This served the US much better than Britain, though, due to its greater population – and therefore number of potential consumers.
In the meantime, old empires, such as those of Russia, Austro-Hungary and the Ottoman Empire, had a hard time – for precisely the opposite reason. In their cases the state was stifling modernisation and consequently, they were not able to compete with countries that embraced the new. Not surprisingly, the Austrian school of economics that appeared at that time was radical in terms of freeing the market from the influence of the state and – from science itself (they didn’t care much about mathematics). The Austrian school did not, however, do much to offer an alternative. Their solution was essentially Darwinian: ‘We can’t figure it out, so let competition and ‘natural’ processes run the show.’ We will see that their visceral hatred of anything ‘top-down’ would have an important role in the emergence of neo-liberalism.
A clash between the new world and the old world was inevitable. Of course, it wasn’t just an academic argument over differing economic policies – it was a full-blown collision over the direction the world should take, and the shifting of the tectonic plates of political as well as economic power. This culminated in a seemingly blind drift into what was at the time the bloodiest global conflict in history – the horrors of the First World War. Could the war have been avoided? It’s unlikely, not only because of what divided the two sides, but arguably also because of what united them: nationalism and national sentiments were encouraged on both sides for fear of the emerging class of workers uniting internationally (as demanded in the Communist Manifesto). This is not to say that there was a conspiracy to start the war, but there is little doubt that, for some, pitting those young people against each other in trenches was preferable to having to fight against them at home. If this seems far-fetched, we should be reminded that nationalism has been and still is used to redirect domestic discontents. Alas, the chances of the proletariat coalescing internationally into a real threat were not great anyway, as the left was too disunited to make it happen.
The years after WWII saw the rise to prominence of someone who would become a towering figure of Anglo-Saxon economics: John Maynard Keynes (1883–1946). He had been trained in neo-classical economics but, being a humanist at heart, Keynes really wanted to reconcile the qualitative (art) and the quantitative (science), as well as the state and the market. He also shifted the focus from discovering how the economy works (abandoning the idea that there are laws of economy akin to those of physics) to how the economy ought to work. Bringing back the normative into economics inevitably meant bringing back the human factor: we do not discover, but create an economy, and what we create may or may not work. For this reason, he rejected both the laissez-faire and the planned economy approaches. However, in his view, the state has an important role as a moderator, to keep the economy in the ‘Goldilocks’ range. When the economy overheats, the state is supposed to use certain mechanisms (e.g. an increase in taxation) to cool it down. When the economy is too ‘cold’ (in recession) the state should use other mechanisms, such as pumping money into the economy, to stimulate it. This money is used to run state-funded projects with the aim of reducing unemployment. In other words, the state should create jobs when private businesses do not, to keep the economy going. The more jobs there are, the more people are paid and the greater is their capacity to spend and buy. This should, in turn, motivate private enterprises to invest in production, employing even more people, and putting the economy on track again.
Friedrich Hayek (1899–1992), the most prominent economist of the aforementioned Austrian school, disagreed. Hayek had, after all, experienced at first-hand the disastrous consequences of state interference and the ensuing hyper-inflation in his native country. In fact, he saw an economic crisis as an opportunity for purging the economy of bad, inefficient businesses. That was supposed to improve the economy without the state having to interfere. If some need to suffer through the process, so be it. The economy is too complicated to be tampered with. In 1931, in four lectures at the London School of Economics, a young Hayek made an attack on the already famous Keynes, but failed to deliver a knockout blow, and the Keynesian economic model won the day. Hayek and the Austrian school of economics went, for the time being, into obscurity, but another prominent figure from the school, Ludwig von Mises (1881–1973), managed to gather a small but devoted group of disciples in the US and keep it alive.
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Although it is unlikely that the then US President, Franklin Roosevelt (1882-1945), was directly influenced by Keynes, he implemented a Keynesian-like remedy to deal with the Great Depression (the financial crash in the 1930s that brought the American economy and the whole system to the verge of collapse). His decisive measures, known as the New Deal (1933-39), and even more so, the Second World War, stimulated the American economy, and the US emerged as a clear winner. For political reasons, the US helped certain other countries, such as Japan, Germany, and Italy, to recover from the war. During this period, Keynes’ influence was enormous. Shortly before his death, he presided over the Bretton Woods conference, at which the International Monetary Fund (IMF) and the World Bank were founded. The post-WW2 economy in the West was essentially modelled on Keynesian principles, creating so-called mixed economies and ushering in a period of unprecedented prosperity in the West. But still, the world was divided.
In contrast to Marx’s predictions, the first, so-called, socialist revolution took place not in the West but in hardly capitalist Russia during the First World War. Contrary to popular belief, Soviet socialism (the planned economy) was economically speaking a phenomenal success. At the start, Russia was a backward, pre-industrial country devastated by the war, as well as by its subsequent civil war. It was under a heavy economic blockade imposed by all the major countries, and was further ravaged in the Second World War. Despite all of this, it managed to substantially improve the living standards of its population, defeat the Nazis, and send the first man into space, thus beating the USA, the most developed country in the world and one that had had no wars on its soil for more than a century. That said, the Soviet system was socialist in name only. It did not transcend capitalism but, in fact, regressed to autocratic, highly hierarchical and bureaucratised political structures. Stalin’s Soviet Union far more closely resembled pre-capitalist, Czarist Russia than anything that could be called socialism. Consequently, the initial successes of its planned economy turned first into stagnation and eventually to complete failure. Despite all the paranoia, the Soviet system was never really a serious alternative to capitalism – it only served as a springboard to push capitalism to an extreme. Even so, after WW2, more than half of the world’s population was under socialist/communist rule, leading to many proxy wars and orchestrated coups by the West, to ‘protect its interests’.
Despite the challenges, the decades that immediately followed WW2 are often considered the golden age of capitalism. People began to believe that things could only get better – the belief in infinite progress became an accepted matter of fact. But, the separations and imbalances we discussed above continued throughout this period, and, at their peak, went further than ever:
- Money: in 1971, the US president, Richard Nixon (1913-1994), decoupled the dollar and gold reserves. This led to the collapse of the fixed exchange rate that had restricted capital flowing across borders and allowed regulators and central banks to have more control over where the finance would go. Until then, credit guidance polices issued by central banks had directed banks in which sector to invest (e.g. manufacturing, strategic industries), while credit flowing into mortgages and financial assets were suppressed. In that period, there were fewer financial crises, less debt, and higher employment. Now, money was linked only to money, and the money supply became increasingly detached from economic output.
- Individualism: around the same period, individualism was also pushed further in many aspects of social life (from art, fashion, ‘self-help’ and new-age spirituality, to post-modern philosophy and some political movements). The left and the right were pretty much united in seeing the state and the ‘establishment’ as an enemy (although for different reasons). The question whether the state was doing a good job or not was abandoned in favour of seeing the government as a problem irrespective of its colours (in the late 1970s in the UK, the unions and the left contributed more than anything else to the fall of their natural ally, the Labour government). All the above paved the way for the rise of neo-liberalism soon after.
- Investment: As we have seen, a rapid separation between investment and production started quite early. This trend continued unabated (except perhaps in the New Deal era), despite creating successive financial crises from the start. Almost every few years a crisis would happen somewhere, the most infamous being the Great Depression in the 1930s. What was different after the collapse of the fixed exchange rate in the early 1970s was that the third degree of separation made the financial market a global force to be reckoned with, ready to shrug off the restraints that states applied in order to prevent boom-and-bust crises.
- Consumerism: It was inevitable that the time would come when satisfying not only existing but also anticipated needs was not sufficient to sustain the system. So, to address a shortfall in total demand, new needs and wants were created. In some ways, this was not something unprecedented. People have always been attracted to novel things they could afford. What was different in this period was that, in order to stimulate mass consumption, the market was increasingly generating and dictating pseudo needs and wants (only indirectly related to real needs and wants). Fashion is an example: many people started throwing away perfectly good clothes just because fashion changed. They didn’t need new clothes and, furthermore, they didn’t even know that they would want those new clothes before it was determined by fashion. The various ways that Thorstein Veblen (1857–1929) identified to make the so-called ‘leisure class’ comply with this insatiable appetite of the system (e.g. ‘keeping up with Joneses’) now became the norm. In order to survive, Capitalism was compelled to create needs.
- Quantity and competition received a further impetus in that period too, the former from the emergence of computer technology, and the latter from moral justifications for unabated competition. The writings of Ayn Rand (1905–1982) and Richard Dawkins’ bestseller The Selfish Gene (1976) are prominent examples of the latter (although these two were at opposite ends of the political spectrum).
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At the crossroads
For a few decades, after WW1 the prosperity increased, not only for some but for the vast majority of people in the West. However, the dominant neo-Keynesians (economists and politicians alike) became victims of their own success. Instead of improving on Keynes’s ideas, they fell prey to a reductionist, mechanistic outlook. The physiocrats had modelled the economy on the human body; in line with their own era, neo-Keynesians modelled the economy on the machine. They even built one, with tanks, pipes and valves that controlled the water flow representing money flowing through the economy (the machine still exists and can be seen in the Science Museum in London). So, you oil the economy machine here and there and everything is supposed to run smoothly. It worked well for a while and gave politicians something to do, but frustratingly, the economy involves people – and people stubbornly refuse to fit neatly into a machine. In the 1970s, neo-Keynesianism failed dramatically and the whole machinery started to unravel.
Around the time when capitalism reached its pinnacle, it also hit its decisive crisis. In retaliation for the West supporting Israel in the 1973 Israel–Arab war, OPEC (Organization of the Petroleum Exporting Countries) turned off the oil taps. This inevitably created an energy crisis and a subsequent full-blown economic crisis in the West. Even though the oil-embargo on Western Europe was quickly lifted (due to a more balanced position taken on the Palestinian-Israeli conflict by the European Economic Community countries (the forerunner of today’s European Community), the price rises still had a significant effect. This was serious (in prudish Britain, the government even advised couples to take baths together to save hot water). In response, the usual Keynesian methods were used – money was pumped into the economy, which raised inflation but this time did not reduce unemployment. The cogs of the machine were lubricated, but they refused to keep turning! The system that had worked so well for a while was falling apart. Inflation and unemployment rising at the same time not only brought into disrepute the neo-Keynesian economic theory that had been relied upon for decades, but also fuelled further civil unrests and destabilised governments. Young people (students), minority groups and women had already been up in arms demanding more freedom and greater equality with partial success. Traditionally friends, left-leaning governments and unions were at loggerheads. Strikes in Britain became out of control, culminating in the so-called ‘winter of discontent’ of 1979, when rubbish piled up, uncollected, on the streets and even dead bodies were left unburied. On the other side of the pond, the US had been rocked by Vietnam, Watergate and civil rights upheavals as well as the energy crisis, and its position of the most powerful nation and leader of the West was somewhat shaken.
There were many economic crises before and after, but this one was decisive because it led to a crossroads. At that point, the leading capitalist societies could have chosen to evolve the system into something more conducive to the changing circumstances. Some, in fact, tried, but they did not prevail. The US and Britain instead pushed capitalism to a new extreme and by doing so, it will be argued shortly, unwittingly sowed the seeds of its downfall. This was perhaps likely, but not inevitable. Marx, among many, claimed that capitalism has inherent contradictions that will necessarily bring it to an end, but this may be somewhat simplistic. A social system is determined, to some extent, by historical circumstances and previous choices, but occasionally, there is an opportunity to make further choices that affect its direction. It’s rather like driving a car on a motorway. Your journey is, for the most part predetermined (you cannot turn left or right), but occasionally you get to a junction where you have a choice – if you make the wrong decision, you have to continue driving, sometimes for quite a while, before you have another chance to turn. For example, in the 1920s, there was a long stalemate in Sweden between the unions and capitalists, which brought the economy to its knees. Eventually, both sides decided to stop fighting and to be more cooperative, with far-reaching consequences for years to come. Historical circumstances in the US and the UK were perhaps less favourable to such an outcome: the ‘two-party system’ was pitching left and right against one other, even when they wanted the same thing! These countries could have chosen a path akin to that of social democracies in Western Europe, but they opted instead to steer the system more to the right, leading to further degrees of separation of the aforementioned features. In a nutshell, instead of evolution they chose counter-revolution. The era of neo-liberalism had begun.
[1] Marx actually changed tack in this respect later in life. In the 1860s, he suggested that most advanced societies might be able to transform the capitalist system peacefully through the ballot box.
